Financial planners’ high-net-worth clients with life insurance needs can leverage premium financing to defer using liquid assets to fund a life policy. Individuals, corporations and trusts are given the ability to pay policy premiums with loan proceeds through premium financing. Typically, the policy owner obtains such financing to pay the annual premiums.
For a client to opt for premium financing, they must meet a few requirements, including having a need for life insurance; the ability to meet life insurance policy underwriting guidelines; and the ability to meet lending institutions’ loan underwriting requirements.
Different strategies for premium financing are designed to fit each individual client’s financial objectives. However, financial planners and clients should keep in mind that not all lending institutions offer every type of loan arrangement.
There are varied products and policy designs that may be used within a premium financing arrangement, including overfunding a policy within MEC limits. By utilizing an overfunded contract, the policy can potentially provide a significant portion of the collateral for the loan and the liquidity that could be used to pay a portion of the maturing loan.
Financial advisors should make sure clients understand that risks related to a premium financing transaction, including the possibility of policy lapse, loss of collateral posted for a transaction, interest rate risk, market uncertainty, and potential failure to requalify with the lender to renew an outstanding loan amount.